“Shinhan Financial Group’s acquisition of Lotte Non-Life Insurance not a bad choice; profitability expected to improve over the medium to long term”

[Financial News] On the 14th, LS Securities maintained its “Buy” rating and target price of 135,000 won for Shinhan Financial Group, expecting the effects of its acquisition of Lotte Non-Life Insurance to materialize over the long term.
Shinhan Financial Group had agreed the previous day to acquire a 77.04% stake in Lotte Non-Life Insurance for 693.3 billion won. It plans to acquire the remaining shares after completing necessary procedures, including approval from financial regulators, and pursue a merger with EZ Insurance.
LS Securities analyst Jeon Bae-seung said, “Given that Shinhan will be unable to receive dividends from Lotte Non-Life Insurance for a considerable period, alongside a decline in its Common Equity Tier 1 (CET1) ratio and the need for additional capital, some negative impact on cash flow is expected. However, the acquisition price is reasonable, and synergies within the group are expected to improve profitability over the medium to long term.”
Net income, which stood at about 50 billion won last year, is expected to rise to at least 100 billion won following the acquisition of Lotte Non-Life Insurance. The acquisition is expected to contribute at least 100 billion won to group earnings, including 20 billion won from loss recovery at EZ Insurance and a 30 billion won consolidation adjustment effect.
Analyst Jeon noted, “The key issue is whether Lotte Non-Life Insurance’s earnings will normalize. Given Shinhan’s experience in improving profitability since the launch of Shinhan Life, and the fact that the ROE of most leading non-life insurers currently exceeds 10%, the acquisition is ultimately expected to have a positive impact on the holding company’s ROE.”
He added, “However, the gap in contract service margins (CSM) held by Lotte Non-Life Insurance and those held by leading insurers is wide, so the effect of improving recurring profitability is likely to take shape over the medium to long term. Broadly speaking, the group needed to strengthen its relatively weak non-life insurance lineup following its 2019 acquisition of Orange Life. Taking into account all the circumstances, including the unavoidable structural decline in profitability in the card business, where the group had traditionally been strong, I believe this will be a not-bad deal.”

[email protected] Seo Min-ji Reporter